China's Housing Market: Affordability, Reform, and Prices

Introduction

Since the founding of the People's Republic of China, most urban residents depended on the public housing system, which provided low-cost accommodation. This system was operated under the "Collecting Rent to Support Public Housing" policy adopted in 1949 by the government (Zhang & Zuoji, 1996). Under this policy, the government collected a nominal amount intended to cover depreciation, maintenance, and management costs. The government's role was therefore limited to constructing the housing units, after which the project was expected to be self-sustaining based on the nominal rent charged. This policy was revised in the 1950s, a period during which the country was undergoing socialist transformation. The revision led to the suspension of the policy, as public housing rents were further reduced by half, making the project financially unsustainable due to inadequate funds to cover post-construction expenditures. Despite this, the government maintained a welfare housing policy that continued until 1970 (Zhang & Zuoji, 1996). With increased rural-to-urban migration came rapid urban population growth, resulting in inadequate urban development planning, biased capital investment, and an unstructured public housing system — all contributing to a severe housing crisis in major Chinese cities. This paper examines the urban housing policy across four periods representing four major housing policy shifts.

The recent increase in the cost of housing in China has attracted global attention. Housing costs have risen by over 200% over the last ten years across 35 major cities, with at least two-thirds of that increase occurring in the early months of 2007. This trend shows no sign of slowing (Wu, Gyourko, & Deng, 2010).

This boom has continued despite the adoption of an economic stimulus program in 2008, which was intended to moderate the country's economic growth rate to an annualized 11.9% by 2010. The program does not appear to have curtailed the rising total outstanding loan balances — which stood at forty percent — or the outstanding residential mortgages.

The government is clearly concerned about conditions in the housing sector. However, it is challenging to assess price levels relative to fundamentals, partly because of limited data and limited prior research. Time series on prices and quantities extend back no further than ten years, since 1998 marked the establishment of a true private market with competitive bidding and market-based pricing. This paper describes and analyzes price-to-rent and price-to-income data for eight major Chinese housing markets — Beijing, Chengdu, Hangzhou, Shanghai, Shenzhen, Tianjin, Wuhan, and Xian — in order to shed light on affordability metrics. Incomes in some of these markets, specifically Chengdu, Tianjin, Wuhan, and Xian, have been relatively on par with, or have slightly exceeded, housing cost growth over the past few years. This contrasts with the coastal regions and Beijing, where housing cost growth has outpaced even the strong income growth seen in those markets. The paper aims to confirm recent data indicating that price-to-income ratios are at historic peaks in Beijing, Hangzhou, Shanghai, and Shenzhen. Evidence also suggests that rents, as opposed to house prices, have not grown significantly in the major housing markets, even as a body of research reveals that house prices have risen sharply in recent years (Wu, Gyourko, & Deng, 2010).

Literature Review

According to Deutsche Bank (2011), the cost of housing in the Chinese market continues to soar amid fears that a bubble burst could be detrimental to both the national and the global economy, potentially triggering a broader downturn. That report identifies a sharp increase in city prices above fundamentally justified levels, while noting that national momentum remains high in the key cities of Beijing and Shanghai. Housing in the top five cities is assessed as still unaffordable for most residents.

Ka Yui Leung and Wang (2007), in their paper "An Examination of the Chinese Housing Market," adopt the DiPasquale and Wheaton model (1996) to examine the state of the Chinese housing market by investigating the effects of different policies. This model is able to account for improvements in the Chinese market. The authors also apply the model to assess the dual-class housing system and to analyze a recent policy shift in China, as well as its potentially independent interest for other countries. Their findings indicate that cross-subsidization would be required to achieve the policy goal of a particular ratio of large to small housing units (Ka Yui Leung & Wang, 2007).

Hongyu and Ying (2004), in Prospects of Real Estate Markets in China, provide an analysis of the Chinese real estate market from the perspectives of housing supply, market conditions, real estate development investment, pricing, and financing. They also analyze the growth potential and prospects of the market with regard to long-term sustainable development, and identify opportunities for foreign participation in professional services, financing, institutional investment, and construction technology.

Housing Reform

As noted above, the government of the People's Republic of China nationalized urban housing units in 1949. From that time through the 1980s, the government controlled the national economic plan and monopolized the distribution of housing. State budgetary funding financed government-owned housing projects, and a private housing market was effectively nonexistent. However, beginning in the 1970s, this began to change as the country undertook a series of economic reforms. The government initiated a privatization process, building residential housing units in several coastal cities, which later expanded to all other cities in the country. This reform led to the development of a private housing sector, with the first real estate developer established in Shenzhen in 1980. Despite this progress, most early commodity housing construction targeted those who could afford market prices — including foreigners and employees of non-state-owned enterprises. The scope of this early market was therefore limited and its growth minimal (Wu, Gyourko, & Deng, 2010).

In 1988, a major shift occurred with the passage of a constitutional amendment that established legal foundations for the growth of the private housing market. While the state retained ownership of urban land, the amendment permitted investors to lease or purchase the right of use for urban residential construction for up to 70 years. The government made further progress in 1990 by issuing a series of reforms targeting the private housing market in order to encourage its development. Under these reforms, residents were encouraged to purchase from their state-owned work units the housing units they already occupied, at subsidized rates. Consequently, work units were directed to terminate the direct housing allocation system.

The milestone in housing reform came in 1998, when the State Council issued a decree prohibiting work units from constructing housing units and instead required them to incorporate any housing benefits directly into worker salaries. This decree is widely regarded as the dawn of the modern private housing market in China. A report by the State Statistics Bureau (2001) indicated that total annual housing supply flow rose from 13% in 1986 to 33% in 1993, then stabilized for the following 13 years before rising again to 72% in 2006.

References

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Appendices

Table 1: Population in the Markets, 1999–2009

Beijing: Population 1999 — 9,717; Population 2009 — 14,918; Change — 53.5%; CAGR — 1.5%
Chengdu: Population 1999 — 11,044; Population 2009 — 12,866; Change — 16.5%; CAGR — 1.8%
Hangzhou: Population 1999 — 6,753; Population 2009 — 8,100; Change — 19.9%; CAGR — 1.9%
Shanghai: Population 1999 — 15,888; Population 2009 — 19,213; Change — 20.9%; CAGR — 3.5%
Shenzhen: Population 1999 — 6,326; Population 2009 — 8,912; Change — 40.9%; CAGR — 3.5%
Tianjin: Population 1999 — 6,834; Population 2009 — 9,598; Change — 40.4%; CAGR — 1.0%
Wuhan: Population 1999 — 8,259; Population 2009 — 9,100; Change — 10.2%; CAGR — 1.5%
Xian: Population 1999 — 7,280; Population 2009 — 8,435; Change — 15.9%; CAGR — 1.5%

Source: China's National Bureau of Statistics

Table 2: Breakeven Expected Appreciation Rates Equalizing Implied User Costs and Rents

Beijing: Breakeven rate — 5.9%; Mean annual appreciation 1998–2009 — 10.1%; Years below breakeven — 6
Chengdu: Breakeven rate — 5.3%; Mean annual appreciation — 6.8%; Years below — 7; Years below (col. 2) — 2
Hangzhou: Breakeven rate — 6.6%; Mean annual appreciation — 8.5%; Years below — 5
Shanghai: Breakeven rate — 5.7%; Mean annual appreciation — 9.3%; Years below — 4; Years below (col. 2) — 1
Shenzhen: Breakeven rate — 5.6%; Mean annual appreciation — 5.1%; Years below — 6; Years below (col. 2) — 2
Tianjin: Breakeven rate — 4.9%; Mean annual appreciation — 6.1%; Years below — 5
Wuhan: Breakeven rate — 4.5%; Mean annual appreciation — 5.5%; Years below — 5; Years below (col. 2) — 1
Xian: Breakeven rate — 4.9%; Mean annual appreciation — 5.1%; Years below — 6; Years below (col. 2) — 1

Source: Wu, Gyourko, & Deng (2010)

Figure 1: Price-to-Rent Ratio in Chinese Cities, 2007–2010. Source: Institute of Real Estate Studies.

Figure 2: Price-to-Income Ratios in Chinese Markets, 1999–2010. Source: Institute of Real Estate Studies.